Bonds

Inverse relation between interest rates and bond prices
B
200
180
160
140
120
100
80
60
40
20
0
2 4 6 8 10 12 14 16 18 20 % r
bond #1 – stated
rate of interest of c 1
= 5% and term to
maturity of T 1
= 10
bond #2 -stated
rate of interest of
c 2
> c 1
and term to
maturity of T 2
=T 1
bond #3 -stated
rate of interest of
c 3
=c 1
and time to
maturity T 3
= 5 < T 1
assumption: bonds 1-3 have the same face value = 100
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